Chinopoly: in a game of political stratagem, China is using Western capital and know-how to further empower and enrich Communist Party members, but its commitment to communism may bring its downfall.

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"China will be the world's next great nation," declared investment and commodities guru Jim Rogers in his 2004 bestseller, Hot Commodities. The 20th century, he noted, "was the American century. The twenty-first will belong to China." Rogers went on:

   Here's how important I think China will be: My daughter, who was
   born in 2003, is learning Chinese. Her Chinese nanny speaks only
   Mandarin to her, and I suspect that she might learn Chinese before
   she learns English. In her lifetime, Chinese will be the most
   important language in the world, next to English. If you are young
   and ambitious, learn Chinese. If you have ambitions for your
   children, persuade them to learn Chinese.

Learning a second language has always been good advice for a young person, and in our ever-shrinking world makes more sense now than ever. And Chinese may be as good a choice as any. However, is Mr. Rogers going a bit overboard? Yes, but he's in crowded company. More than a few other "experts" in business, banking, economics, and political affairs have been preaching the same gospel. Headline stories proclaiming "The China Miracle," "China, the New Superpower," and "The China Century" have been proliferating for years.

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China's rags-to-riches-in-one-generation story is impressive indeed. Its journey from poverty-stricken, Third World nobody to top A-list business partner in 30 years is nothing less than stunning. The Asian Development Bank's Eminent Persons Group may be correct in claiming that "the speed and depth of Asia's economic progress are unprecedented in world history." While the bankers were writing about Asia in general, they undoubtedly had China foremost in mind.

Virtually overnight, Communist China has gone from a pre-industrial, rural society to the world's manufacturing capital. It is now the largest producer and exporter of consumer electronics, footwear, luggage, textiles, apparel, toys, household appliances, seafood, and numerous other products. It has amassed the largest foreign-exchange reserves in history, reportedly in excess of $1.4 trillion. And it is flexing that muscle in the global arena, investing in Africa, Latin America, Asia, the Middle East--and the United States. That money is now being used to buy up Western assets, including in the United States, as the article on page 16 explains.

Not Above Laws

However, behind the litanies of China's economic triumphs and all of the hype about China as the emerging hegemonic power are some dark secrets. They are secrets that are well known but rarely mentioned by the Wall Street insiders, the major media organizations, and the bipartisan political lobby, which together have been the main forces pushing China's mercurial development. The truth is that China's continued economic, political, and military ascendancy is far from certain. In fact, it faces some very daunting challenges that some China watchers say could be its undoing.

First and foremost is the fact that the laws of economics have not been repealed. Productivity and general prosperity are maximized in market economies in which the actions of private citizens freely determine supply and demand. State-run economies, as all history has shown, are stagnant, inefficient, wasteful, repressive, and invariably result in a gross inequality in the distribution of wealth between the socialist rulers and the ruled.

Its impressive advances notwithstanding, the People's Republic of China remains an inefficient, oppressive, one-party communist state that could not have achieved its recent phenomenal development, except for the suicidal policies of the U.S. government (along with other noncommunist governments) that transferred enormous capital, technology, and know-how to the Beijing regime, in violation of all economic and moral principles. And, in spite of its enormous gains and momentum, Communist China would quickly atrophy and crumble if the American people forced our politicians to end the destructive trade, spending, regulatory, and monetary policies that are destroying our middle class and transferring our manufacturing and technology base to China.

What? But everybody knows that China has been "reforming" and is in the process of "transitioning" from socialism to free-market capitalism, right? No, its leaders call its new path "market socialism." Yet the China aid and trade lobby here in the United States insists that China has adopted a genuine market economy and that that path is irreversible. Besides, unimpeachable authorities, such as Microsoft's Bill Gates, the richest capitalist in the world, agree that China has gone capitalist. "China is amazing," Gates declared after a 2004 trip to the Middle Kingdom. "It is capitalism, but at an unprecedented speed."

The declarations of Gates and the Wall Street gurus notwithstanding, China has not adopted a market economy, and there is little reason to believe it ever will, as long as we continue to support its current socialist counterfeit system. "Market socialism" is as much an oxymoron as dry water, kosher ham, or compassionate government. It doesn't exist and never has.

Party, Princelings, and Power

But what about the rapidly proliferating Chinese millionaire and billionaire entrepreneurs that Forbes magazine profiles each year? Forbes' list of China's super-rich made an eye-popping jump from 15 billionaires in 2006 to 66 in 2007. Are they not proof of China's market orientation? That's the usual media take on it, like the 2006 USA Today report that exulted that "a country that once persecuted disciples of free enterprise is now barreling down the capitalist road." The "capitalism" that exists in China has little to do with entrepreneurialism. Rather, it is a form of statist monopoly capitalism that is reserved for the privileged "princelings," who are either Communist Party members or the favored relatives and associates of Party members.

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As China Digital Times points out, "90 percent of China's billionaires are children of senior officials. There are about 2,900 senior officials' children in China, with total wealth amounting to two trillion yuan. Their businesses mainly cover 5 areas: finance, foreign trade, land development, large-scale projects, and bonds and securities." The Digital Times was not speculating. Like a number of other publications, it based its reporting on a published study by the PRC's own China Academy of Social Science and the Research Office of the (Communist) Party School.

Let's be a little more specific. Take, for instance, the top dog on Forbes' list of "Asia's Self-Made Billionaires," Li Ka-shing, chairman of the mammoth Hutchison Whampoa conglomerate ($47 billion) and personally worth a reported $23 billion. Known as the "Hong Kong Superman," Ka-shing's fortunes have been closely tied to China's banks and corporations of the People's Liberation Army for many years.

China's market socialism is dominated by state-owned enterprises (SOEs) run by Communist Party princelings and foreign companies that operate under tight controls imposed by the Party and are directed more toward making products for export.

Even The Conference Board, a business research group that strongly supports increased trade with China, acknowledges, in its December 2007 report entitled Can China's Growth Trajectory Be Sustained? that China's moves toward market reforms have been dismally slow. The study, which focuses on the decade of 1995-2005, notes that in the early years of that period--which is to say, 20 years after the beginning of so-called reform--"large-and medium-sized domestic private firms were virtually non-existent. Even as late as 1999, employment in these enterprises was still less than one percent of the total. By 2003, they accounted for 4.9 percent."

Yes, 30 years after the transition to market socialism, China is still 95 percent socialism and 5 percent market! SOEs, with their ties to the Party, receive favorable bank loans and contracts, as well as special tax, trade, and regulatory favors not available to genuine entrepreneurs. But even that bleak picture does not tell the whole story. For, as many economists and China observers have pointed out, even many of those firms officially designated "private" are, in essence, state entities.

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Man vs. Mao

Guy Sorman is a French author, journalist, philosopher, and economist who has regularly visited China over the course of three decades. He has ventured beyond the Party's tourist traps and show places, into the rural hinterlands where one billion Chinese live in the most squalid conditions and under harshly repressive communist rule, conditions rarely seen by Western visitors to Beijing and China's coastal urban centers.

In a searing essay for the Spring 2007 issue of City Journal entitled "The Empire of Lies," Mr. Sorman tackled many of the most commonly believed falsehoods about China. "Many in the West think that Chinese growth has created an independent middle class that will push for greater political freedom," he notes. But what exists in China, he reports, "is not a traditional middle class but a class of parvenus, newcomers who work in the military, public administration, state enterprises or for firms ostensibly private but in fact Party-owned." Sorman continued:

   The Party picks up most of the tab for their mobile phones,
   restaurant bills, "study" trips abroad, imported luxury cars and
   lavish spending at Las Vegas casinos. And it can withdraw these
   advantages at any time. In March, China announced that it would
   introduce individual property rights for the parvenus (though not
   for the peasants). They will now be able to pass on to their
   children what they have acquired--another reason that they aren't
   likely to push for the democratization of the regime that secures
   their status.

There are a few brave souls, of course, who refuse to toe the party line. One of the privileged-turned-pariahs Sorman interviewed is Mao Yushi, an internationally esteemed economist who, in 2004, had the temerity to send a polite petition, signed by 100 fellow intellectuals, to the Chinese government, asking it to apologize for the Tiananmen Square massacre. For this "crime," Professor Yushi lost his teaching position at the university and has had to endure years of house arrest. Sorman writes:

   Many goods that China produces are worthless, Mao Yushi reminds
   me--especially those made by public companies. About 100,000 such
   Chinese enterprises continue to run in the old Maoist style,
   churning out substandard products because they've got to hit the
   targets that the Party sets and provide employment to those the
   Party cannot dismiss, not because they're responding to any market
   demand. Most public-sector firms don't even have real accounting
   procedures, so there's no way of ascertaining profitability. "China
   is not a market economy," Mao says bluntly.

The Party directs the state banks as to whom loans should go, says Mao, and the rationale is frequently political or personal, not economic. "Indeed, in many cases, banks are not to ask for repayment," Sorman notes. "That investment decisions obey political considerations and not the law of the market is the Chinese economy's central flaw, responsible at least in part, Mao Yushi believes, for the large number of empty office buildings and infrequently used new airports and an unemployment rate likely closer to 20 percent than to the officially acknowledged 3.5 percent."

How, Then, Does China Excel?

If China is still a socialist economy and socialism doesn't work, how does one explain the regime's stellar successes? Quite simply, a socialist system can be productive--if it allows external sources to provide the capital, technology, and expertise that it lacks, and if there are external sources able and willing (and foolish enough) to provide those things.

China simply drew on the experience of V.I. Lenin, who had faced a similar crisis in the early Bolshevik period in Russia. Having wrecked Russia's economy, the communists' new regime was facing imminent collapse in 1921. As a temporary measure, Lenin made peace with the hated capitalist West and invited foreign aid, foreign investment, and foreign expertise. His New Economic Policy (NEP) lasted for nearly a decade, including several years under his successor, Joseph Stalin.

By the late 1960s, China's communist leaders Mao Zedong and Zhou Enlai were in about the same fix that Lenin had found himself in 1921. Their disastrous Great Leap Forward and Cultural Revolution programs had caused tens of millions of deaths and devastated China's economy and society. They needed help from the West to survive.

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Help was on the way. In July 1971, President Nixon's National Security Adviser Henry Kissinger and Kissinger's assistant Winston Lord (later to be U.S. Ambassador to China and president of the Council on Foreign Relations, or CFR) made their now-famous secret trip to China to visit Mao and Zhou. That set up the much more famous Nixon-Kissinger trip to China in 1972, and the equally important trip a few months later of David Rockefeller, chairman of the Chase Manhattan Bank and the CFR. Returning from his Beijing visit with Mao and Zhou, Rockefeller declared, "The social experiment in China under Chairman Mao's leadership is one of the most important and successful in human history." Mass murderer Mao's "social experiment" had by that time taken the lives of up to 64 million Chinese.

But those deaths did not deter Rockefeller. He began arranging loans and technology transfers for Mao's New Economic Policy, just as he had been doing for years for similar projects in the Soviet Union. However, even a banker and king maker as famous as he would not have been able to coax Western corporations and investors into Mao's communist "workers' paradise" without government guarantees to cover the risk of failure or expropriation. That is where the loans, grants, guarantees, subsidies, and insurance from the World Bank, Export-Import Bank, International Monetary Fund, Asian Development Bank, Overseas Private Investment Corporation, and other U.S. and UN entities came in. They not only provided billions of (taxpayer) dollars directly to China and/or the banks and companies doing business with her, but just as importantly, convinced the global business community and U.S. taxpayers that China was indeed "going capitalist."

They Admit It's True

While U.S. politicians, bankers, and corporate elitists have been selling the message of China's conversion from Maoism to "market socialism," the Communist Party of China and communist parties throughout the world have gone to great lengths to explain that this is just a replay of Lenin's NEP strategy, albeit on a longer timeline.

Over the years, Political Affairs, the official monthly journal of the Communist Party, USA, has published many essays explaining this to the Party faithful. Most recent is a Political Affairs Online article for September 5, 2007, by C.J. Atkins entitled "The Leninist Heritage of the Socialist Market Economy."

"Just as China's socialist market economy is today dismissed by many in academia and the bourgeois press as a return to capitalism, it is important to recall that Lenin too faced similar criticism during the early years of Soviet power," Atkins wrote. "[Lenin's] New Economic Policy (NEP) was often characterized by critics, both outside and inside the Communist movement, as an abandonment of socialism and Marxist ideology."

Atkins continued:

   Like Soviet Russia in the years following the October Revolution,
   China today also finds itself facing a world economy dominated by
   and structured in the interests of the most powerful capitalist
   economies. Just as Lenin did in the 1920s, the Communist Party of
   China (CPC) bas, since 1978, reached the conclusion that the
   liberation and development of the productive forces is the key to
   building the foundations for a transition to socialism.

Yes, China's economic successes, made possible by the massive aid and trade transfers from the West, are "building the foundations for a transition to socialism," not to free-market capitalism. But more importantly from the American point of view, these transfers, together with the U.S. regulatory and tax policies imposed on the American economy, are enabling China to drive us into the ground economically, and even (as the next article shows) to grab up our assets in a big way.